States inch towards reforms

Ever since the Fiscal Responsibility and Budget Management (FRBM) Bill was introduced in the Lok Sabha way back in December 2000, the Centre had stated its intention of reining in its fiscal deficit.

The FRBM has been enacted now, but the Centre has hardly managed to cut its non-Plan expenditure. It is the states, however, that have moved forward slowly and steadily.

Between 1999-2000 and 2002-03, the gross fiscal deficit of 29 states as a percentage of GDP dropped from 4.72 to 3.83. During the same period, the Centre's fiscal deficit rose from 5.4 per cent in 1999-2000 to 5.9 per cent, according to the revised estimates for the last fiscal.

While the states' own compulsions have forced them to tighten their belts, it would be fair to acknowledge the Centre's role in prodding them to improve.

In 2000-01, the finance ministry issued guidelines to states for a medium term fiscal reforms programme (MTFRP). The MTFRP required states to dovetail time-bound reforms in four broad areas: fiscal, power, public sector and budgetary.

The guidelines anticipated that if all the states, on an average, achieved a 5 percentage point reduction in the ratio of revenue-deficit-to-total revenue receipts consistently every year, they would register a surplus by 2005-06.

A monitoring committee, set up on the recommendations of the Eleventh Finance Commission, approved the reforms programme of 21 states.

Based on the MTFRP, 13 states -- Orissa, Karnataka, Manipur, Nagaland, Maharashtra, Jammu & Kashmir, Rajasthan, Arunachal Pradesh, Assam, Andhra Pradesh, Kerala, West Bengal and Tripura -- signed memoranda of understanding with the finance ministry.

The finance ministry recently made an interim assessment of the fiscal reforms in the states. From 1999-2000 to 2002-03, states saw their revenue deficit drop from 2.78 per cent of GDP in 1999-2000 to 2.04 per cent in 2002-03.

Of the Rs 10,607 crore (Rs 106.07 billion) incentive fund set up based on the recommendations of the finance commission, the Centre has released Rs 2,713 crore (Rs 27.13 billion).

West Bengal (Rs 302 crore), Rajasthan (Rs 171 crore), Himachal Pradesh (Rs 161 crore) Jammu & Kashmir (Rs 321 crore) and Nagaland (Rs 97 crore) have been some of the larger beneficiaries of grants from the fund.

An additional Rs 2,363 crore (Rs 23.63 billion) has been allocated by way of open-market borrowings to seven states including Andhra Pradesh (Rs 1,200 crore), Tamil Nadu (500), Orissa (300) and Kerala (250).

The finance ministry's guidelines required the states to reduce their revenue deficit-to-total revenue receipts ratio by 15 percentage points between 1999-2000 and 2002-03.

The ratio stood at 26.02 per cent in 1999-2000 and dropped to 17.17 in 2002-03, a roughly 9 percentage point drop.

The finance ministry considers it a significant achievement though 3 percentage points of this drop is accounted for by Central transfers.

Still, states' own fiscal efforts helped them post a six percentage point improvement in the single monitorable indicator of reforms.

The most worrisome factor on state finances, a finance ministry official said, was the rising interest payments. Between 1999-2000 and 2002-03, the interest payments rose from Rs 44,630 crore (Rs 446.30 billion) to Rs 71,178 crore (Rs 711.78 billion).

As a percentage of GDP, it rose from 2.3 per cent to 2.9 per cent and as percentage of total revenue receipts, it rose from 22 per cent to 23.9 per cent.

This has partially been take care of by the debt swap scheme which enables states to pre-pay expensive loans contracted from the Centre with low coupon bearing small savings and open market loans.

Officials said that if the current regime of low interest rates continued for the next two years, states would be able to swap all Central loans carrying a coupon of 12 per cent or more.

This will bring about savings in interest as well as deferred capital repayments of approximately Rs 98,000 crore (Rs 980 billion) over the residual period of the loans.

While it is true that the ultimate objectives of states' MTFRP -- a gross fiscal deficit of 2.5 per cent of GDP and a zero revenue deficit by 2004-05 -- are unachievable, much can be done to turn the tide.

The Centre needs to relook the question of debt and guarantees, continue with the debt swap scheme and bribe states to undertake reforms with much more seriousness.

As far as reforming state finances is concerned, the Centre's performance has been impressive. Let's not talk about the Centre's finances, then.

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